Murray realises the superannuation system isn’t working

David Murray says the timing of his interim report into the financial system “isn’t bad" because it avoided the potential for the over-reaction common immediately after the global financial crisis.

The timing for the government isn’t nearly so convenient – particularly given its urgent determination to alter the rules governing financial advice.

This draft report can hardly be accused of scaremongering, given its overall assessment the financial system has performed “reasonably well in meeting financial needs of Australians and facilitating productivity and economic growth".

But Murray was keen to highlight the problems with superannuation and financial advice, given the significance of superannuation to the economy and to the adequacy of people’s retirement incomes. The growth of super to become a $1.8 trillion behemoth is also one of the most important changes to the Australian financial system since the last major inquiry in 1997.

David Murray’s report suggests the quality of advisers is highly “variable”, that customers don’t understand complex disclosure statements and that conflicted remuneration only compounds the risks and compromises the quality of advice.

What is increasingly obvious is that the superannuation system is not working as effectively or efficiently as it should be despite its rapidly growing size. In particular, the report suggests that the quality of advisers is highly “variable", that customers don’t understand complex disclosure statements and that conflicted remuneration compounds the risks and compromises the advice.

It says fees in Australia remain very expensive in global terms and haven’t fallen as expected given economies of scale.

The awkward point for the government is that so many of the committee’s “observations" about how to fix all this head in the opposite direction to changes it is attempting to get through the Senate – even though Murray is not prepared to say so clearly yet.

The government now looks likely to succeed in the Senate, courtesy of agreeing to more
Clive Palmer
amendments. But while this is testament to the ability of Finance Minister
Mathias Cormann
to talk his way out of a brown Palmer bag, it is likely to turn out to be a Pyrrhic victory for the Coalition. More financial scandals are inevitable. It will be much easier to blame the government.

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Despite the government’s emphasis on wanting to reduce red tape and make advice more affordable to more people, for example, the report notes that “lower-cost advice still needs to be of reasonable quality to provide a benefit". There’s absolutely no guarantee of getting that quality – rather the reverse – and customers don’t know how much it will cost them until it’s too late.

The report blames the abundance of poor-quality personal advice on low minimum competence requirements for advisers and the pernicious influence of conflicted remuneration – which Labor’s reforms tried to fix.

It suggests the need for much higher training and qualification standards for advisers and enhancing the Australian Securities and Investments Commission’s power to ban people managing a financial services business. No real argument possible there.

The most disputed area of the government’s proposed changes lies in the potential for return of conflicted remuneration and conflicts of interest.

The government insists limited “incentive’’ payments cannot be called commissions, a term regarded with horror given the scandals of the past several years. Apart from the government, the banks and now Clive Palmer, most people can’t see the difference between incentives and commissions. There is also deep suspicion of the banks’ intention to dramatically expand their grip on super and the role incentive payments for staff will play in that.

That’s a sensitive issue given such incentives for staff will be permitted in the provision of “general advice" depending on the volume of wealth management products employees sell.

That’s because general advice allows bank staff to recommend products to customers as long as they don’t suggest this recommendation takes individual financial circumstances into account.

That is still the province of “personal advice", which is comprehensive, complete with those incomprehensible statements of advice, but expensive. Most people don’t want to pay for that, particularly now the fees are more transparent after the banning of commissions, and the consumer confidence in the results is understandably low.

That leaves a large gap the banks are keen to fill with the lure of supposedly “free" general advice.

Yet as the Murray report says, the boundary between personal advice and general advice can be hard to draw and consumers might not recognise it anyway. The report considers changing the labels. General advice could be called “sales" or “product information".

The banks are unlikely to appreciate this logic. And thanks to Palmer’s Senate U-turn, they will be far more focused on what they see as the new growth area of general advice on super than potential long-term changes in the Murray report.

The
Commonwealth Bank
wealth management debacle – and more significantly the failure to deal with it properly afterwards – demonstrates that the public disquiet and lack of confidence won’t be so easily assuaged.

Murray is pointing, albeit politely, at system-wide flaws in the massively important financial system. The rules clearly have created plenty of problems that need addressing. But the government’s “reforms" to financial advice are likely to make those risks larger given the money at stake. Just wait.